Remember ‘Candy Crush’? Mobile Gaming Stocks Are Still Worth Playing

I recently re-downloaded Candy Crush Saga, which I deleted years ago to free up time for reading—or so I told myself at the time. I didn’t remember much about the game at first, but it’s easy to pick up: You move little candies around until they pop; more appear, and so on.

Lots of little candies have popped since I last played.
Activision Blizzard
’s (ticker: ATVI) King division recently released Candy Crush’s 5,000th level. In May, Activision CEO Bobby Kotick said that “well over” a half-billion unique users have played the game since its 2012 launch.

In essentially just a decade since the smartphone launch, mobile gaming has become big business; it’s expected to generate $68.5 billion in revenue this year, according to Newzoo, or 45% of the gaming industry’s global total. It “has come from nowhere to become, by far, the largest segment of the gaming world,” says Macquarie Research analyst Benjamin Schachter.

Games represented nearly three-quarters of all app store downloads in 2018, according to App Annie, which estimates that they’ll make up 60% of all mobile app store spending this year, up from 35% in 2013.

Forgo, therefore, the temptation to dismiss Candy Crush and its counterparts as frivolous fun: King accounted for 32% of Activision’s $3.2 billion in first-half revenue and 39% of its operating income.

Last week, this column covered opportunities among the console-focused gaming stocks. But the mobile group also has rewarded investors who made well-timed buys. Words With Friends maker
Zynga
(ZNGA) and Angry Birds producer
Rovio Entertainment
(ROVIO.Finland) have both outperformed the S&P 500 index this year. That could continue, although the small-cap stocks are likely to remain volatile. When just one game disappoints or gets delayed, it’s difficult for these companies to hide.

The surprising thing about mobile gaming’s significant revenue is that the apps themselves are usually free. Distributed through app stores such as
Apple
’s (AAPL) and Google’s, they’re monetized through advertising or in-app purchases.

“You’ve got a device that everyone carries with them literally 24 hours a day, and can be used to access any game within a few seconds,”
Glu Mobile
(GLUU) CEO Nick Earl tells Barron’s. “That’s a dynamic we love.”

Among U.S.-based pure-play mobile gaming stocks, Glu—known for Diner Dash and Kim Kardashian: Hollywood—might be the most attractive. Glu’s stock is down 42% in 2019, giving the company a market value of just $688 million. A series of missteps, including the delay of a game licensed from
Walt Disney
(DIS), has given investors pause.

Glu’s Earl insists that the wait for the Disney game—now scheduled for early 2020—will be worth it. He’s looking for the game to deliver for a decade, à la Candy Crush. Same for a planned addition to Glu’s Deer Hunter franchise. In July, Glu’s Covet Fashion style game managed the best revenue day in its six-year history, Earl says. “We believe that the long-term viability of the [Disney] game massively outweighs the need to make an artificial date,” he says.

Not all investors are convinced. The stock, at a recent $4.72, was trading around 13 times expected forward earnings, near its five-year low. Zynga and Activision both fetch about 23 times.

Glu “is taking the right steps to start to regain investor confidence,” wrote Stephens analyst Jeff Cohen, who has an Overweight rating and a $7.75 price target on the stock, in mid-August. “The company has a robust game slate planned for 2020 and will take a more conservative approach to guidance, which we think sets the stage for them to return to a beat-and-raise story.”

A couple of factors could soon draw more investor attention to the mobile-gaming industry. One is Apple Arcade, due later this fall, which will package a library of mobile games across Apple devices, for a flat monthly fee, with no in-app purchases or ads.

Subscriptions are a trend worth watching, but they’re unlikely to have a big effect in the world of mobile gaming. Candy Crush’s most devoted customers, after all, have never balked at a stream of one-time payments.

“We continually invest in our storefront, developer tools, security processes, and commerce offerings to build the best possible marketplace for the Android ecosystem,” a Google spokesperson told Barron’s in an email. Apple didn’t respond to our request for comment, but it has previously noted that a “full 84% of the apps in the App Store pay nothing to Apple when you download or use the app.”

But any move—voluntary or forced—to lower app store fees would have a big impact on the profitability of mobile game makers. “There are once-in-a lifetime opportunities where you can see structural margin improvements of 10 or 20 or 25 points,” Schachter says. “That just doesn’t happen, in any industry.” And it still might not happen, of course. But for tech investors worried about the threat of regulation, mobile gaming could be an under-the-radar way to hedge against the risk.

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